We Think Sastasundar Ventures (NSE:SASTASUNDR) Has A Fair Chunk Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Sastasundar Ventures Limited (NSE:SASTASUNDR) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Sastasundar Ventures

What Is Sastasundar Ventures's Debt?

As you can see below, at the end of September 2021, Sastasundar Ventures had ₹219.6m of debt, up from ₹12.3m a year ago. Click the image for more detail. However, it does have ₹98.9m in cash offsetting this, leading to net debt of about ₹120.7m.

How Healthy Is Sastasundar Ventures' Balance Sheet?

We can see from the most recent balance sheet that Sastasundar Ventures had liabilities of ₹789.8m falling due within a year, and liabilities of ₹52.6m due beyond that. Offsetting this, it had ₹98.9m in cash and ₹288.3m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹455.2m.

Since publicly traded Sastasundar Ventures shares are worth a total of ₹13.2b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Carrying virtually no net debt, Sastasundar Ventures has a very light debt load indeed. When analysing debt levels, the balance sheet is the obvious place to start. But it is Sastasundar Ventures's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Sastasundar Ventures reported revenue of ₹6.0b, which is a gain of 21%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate Sastasundar Ventures's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost ₹298m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through ₹313m of cash over the last year. So to be blunt we think it is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Sastasundar Ventures has 2 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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